The Impact of Government Spending and Taxation on Economic Growth in Tanzania (1967 – 2017)

Abstract

This study seeks to examine the effect of government spending and taxation on economic growth in Tanzania for the 1967-2017 period. To achieve this objective, the study utilized secondary data and analyzed it using Augmented Dickey Fuller Test (ADF) and Phillips-Perron test statistics for unit root test and ARDL model for assessing effects on economic growth.   Augmented Dickey Fuller Test and Phillips-Perron Test revealed that development expenditure, recurrent expenditure and income tax were initially not stationary at level but they became stationary after first differencing while real GDP was initially stationary at level. ARDL approach to co-integration bound test revealed that there was a co-integration among the variables. Moreover, ARDL revealed that there was significant evidence that, in the short run, recurrent expenditure and income tax negatively affected economic growth while development expenditure affected economic growth positively. The test also revealed that, in the long run, development expenditure had a positive and significant effect on growth rate while income tax had a negative impact. Likewise, recurrent expenditure had a negative and significant effect on economic growth. The study recommends that the government should increase the proportion of its annual budget on development expenditure so as to encourage aggregate demand and therefore influence a higher level of economic growth.